01 POWER ISLAND / 01 CCPP / DOE__Understanding Natural Gas and Lng Options October 11 2017_1

ENVIRONMENT, SOCIAL IMPACT AND SAFETY

Safety

Safety is critical in any industrial project, but LNG export or import projects can introduce specific safety considerations, mainly owing to the sheer size of the energy storage facilities involved. The LNG sector has been operating now for over 50 years, with a good safety record, mainly as a result of diligence and planning to ensure that very high standards are maintained in project planning, design, procurement, construction, and operating phases of the project. While liquefied gas is inherently a safe substance which does not burn directly, the vapor that it generates, effectively natural gas, is flammable, and care must be taken in handling vapor to avoid a release. In many countries, LNG is classified as a hazardous material (despite the industry's excellent safety record and the stability of LNG until it starts vaporizing), and rigorous standards often apply to its storage and transportation. Various international or trade bodies also publish safety standards, some of which are used internationally.

How LNG containment is considered by the industry is summarized in this illustration from the industry trade body Groupe International d'Importeurs de Gaz Natural (GIIGNL):

Source: GIIGNL

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The whole design basis for an LNG facility is built around minimizing the chances of a containment failure. However, in the unlikely event that this may occur, an uncontrolled release of LNG could lead to jet or pool fires if an ignition source is present, or a methane vapor cloud which is potentially flammable (flash fire) under unconfined or confined conditions if an ignition source is present. LNG spilled directly onto a warm surface (such as water) could result in a sudden phase change known as a Rapid Phase Transition (RPT), which can also cause damage to nearby structures.

The following features are typically among the recommended measures to prevent and respond to LNG spills:

>A spill risk assessment should be conductedfor the facilities and related transport/shipping activities.

>A formal spill prevention and control plan should be developedthat addresses significant scenarios and magnitude of releases. The plan should be supported by the necessary resources and training. Spill response equipment should be conveniently available to address all types of spills, including small spills.

>Spill control response plans should be developed in coordination with the relevant local regulatory agencies.

>Facilities should be equipped with a system for the early detection of gas releases, designed to identify the existence of a gas release and to help pinpoint its source so that operator-initiated ESDs can be rapidly activated, thereby minimizing the inventory of gas releases.

>An Emergency Shutdown and Detection (ESD/D) system should be available to initiate automatic transfer shutdown actions in case of a significant LNG leak.

>Clear and well-rehearsed procedures governing the loading and unloading of vessels, should have a focus on ensuring appropriate coordination between the Master or the vessel and any shore-based operations.

>Onshore LNG storage tanks must comply with the double containment principle that involves a completely redundant layer of LNG containment, only used in the unlikely event of primary containment failure.

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>Facilities should provide grading, drainage, or impoundment for vaporization process, or transfer areas able to contain the largest total quantity of LNG or other flammable liquid that could be released from a single transfer line in 10 minutes.

>Material selection for piping and equipment that can be exposed to cryogenic temperatures should follow international design standards.

>In the case of a gas release, safe dispersion of the released gas should be allowed, maximizing ventilation of areas and minimizing the possibility that gas can accumulate in closed or partially closed spaces. Spilled LNG should be left to evaporate and the evaporation rate should be reduced, if possible, e.g. covering with expanding foam.

>The facility drainage system should be designed such that accidental releases of hazardous substances are collected to reduce the fire and explosion risk and environmental discharge.

>Hydrocarbon leak detection must be situated throughout the facility. Another design feature which has been shown to be of critical importance is the suitable separation of offices/accommodation from the potentially hazardous plant.

Finally, the emergence of new LNG technology categories, such as FSRUs or FLNG facilities, may require additional features broadly comparable with the guidelines above, adapted to a marine environment.

The HSE requirements for the FLNG projects should cover drilling and completion, construction, installation, commission, start-up, production, maintenance, and decommissioning operations. The design philosophy should be based mostly on the concept of personnel-safety first, due to the fact that there is a limitation of space within the platform.

The project development is supported by a HSE design based on a formal risk-based assessment process, through the following relevant studies:

>Hazard identification by analysis (HAZID, HAZOP) is performed to find out the relevant HSE concerns associated with the project.

>Specific HSE studies to validate the layout and define all necessary measures and protections to put in place (i.e. fire and explosion risk analysis, emission and gas dispersion studies, such as heat radiation, etc.).

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>Quantitative Risk Analysis.

>Verification of the measures to prevent, control or mitigate the consequences of these hazards.

>Identification of changes or additions to the design in order to improve the prevention, control or mitigation of the consequences of the identified hazards.

>Demonstration that personnel risks are, at worst, ALARP (as low as reasonably practicable).

Security Considerations

The concentration of very high-value plant and equipment with a large, potentially hazardous energy store creates unique security concerns for national governments. The host government will be concerned about the strategic nature of the assets and the related petroleum revenues, investors/lenders will focus on the security of their invested capital in the asset, whereas natural gas customers may have security of supply concerns, particularly where a particular facility supplies a significant portion of a third country's energy supply.

Because of these factors, safety and security of LNG facilities are rarely discussed in a public forum but nevertheless attract considerable attention internationally. The security agencies of many countries where LNG import or export facilities exist, or who receive strategic LNG supplies from elsewhere, all have very well-developed arrangements, procedures and emergency plans in hand, and this expertise is best accessed through government-to-government dialogue.

Marine security for LNG tankers entering or leaving a facility can be provided by the national government through their Coast Guard or Navy. Adequate equipment and personnel are needed to ensure safety. Typically, all crew must be cleared by national government officials, not only by the companies who employ them.

In some regions, piracy may be a concern for ocean-going LNG carriers, and various special measures may be required to address this threat.

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Social and Economic Impact

The social and economic impact of major gas developments has taken greater significance within the last decade as the global gas industry has reached a scale and impact such that local communities are requiring more transparency and using media to hold operators accountable. Social and Economic Impact Assessments are important to provide a baseline of the local community prior to the project development and to facilitate monitoring the potential changes on the local communities during the project. These studies ensure responsible operations as well as environmental safety.

Some of the communities where gas projects are being considered are economically disadvantaged and the impact of the project will be designed to improve the economic conditions of both the host communities and the state. Under the sustainability condition, the community may remain in their current location and way of life, but project development may result in relocation or possible disruption of community standards which will be addressed by a social development plan.

The ultimate goal of the social impact assessment is:

>Provide a social development plan that will, amongst other things, provide mitigation measures to deal with any potential adverse community economic impacts.

>Reduce company risk of operational disruption by collecting baseline data and undertaking continuous monitoring.

Main Social Impacts

The social development plan orchestrates the positive economic impact and aims to eliminate the potential negative social and economic impacts that may result from the development of gas projects. Some of these impacts are:

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>Job creation: increased income generation opportunities from direct and indirect job creation at local, regional and national levels.

>Reduced income-generation opportunities related to fishing: The ocean is for these communities an important natural resource for community living, used for fishing and transportation of goods from one to other economic areas.

>Resettlement of local communities including potential physical displacement along pipeline corridors.

>Loss of subsistence crops within the right of way.

>Impact on traditional governance mechanisms and structures.

>Loss of local ‘Sense of Place’ and decreased social and cultural cohesion.

>Potential increase in anti-social behaviors.

>An increase in vector-borne and communicable diseases.

>Increased injuries and mortality from traffic accidents.

>Reduced access, pressure and overburdening of physical and social infrastructure.

>Improvements related to community development initiatives.

>Impact on landscape and visual environment during construction.

>Construction exposure of workforce to insufficient health and safety standards.

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Social and Economic Development

Plan - "Social License to Operate"

There are numerous regulatory and licensing processes required to fully permit the project, however obtaining and maintaining a "social license-to- operate" for the project requires focused and targeted effort, engaging with the host communities and the state to create a robust social and economic development plan to cover the anticipated life of the project that is clear and consistent from the outset of the project to provide certainty to host countries and to developers. This has challenged the development of extractive industries for a long time and has negatively impacted many projects. An example of how this can play out if inadequate benefits filter down to local communities is the chronic troubles in the Niger Delta in Nigeria where frequent pipeline attacks cripple large portions of Nigeria's oil and gas infrastructure.

The cost associated with the social and economic development plan to mitigate against social risk and disruptions may be between one and five percent of total capital expenditure. Project developers, as part of their social responsibility or "Social License to Operate" may take on additional tasks that are not specifically required to ensure project completion but which are important to the community in which they operate. A robust development plan may link the economic interest of the plant and the communities thereby creating an alignment of interest for mutual benefits. This is a pragmatic economic and ethical framework in which the project company has an obligation to act for the benefit of society at large, for the benefit of the host community, and for the well-being of the investment.

The social and economic development plan may be influenced by four main factors: legislation, licensing process, land acquisitions and stakeholders:

>Rigorous, complex, and dynamic legislation: regulation should be clear and should benefit from changes, increases, and improvements made in other countries in order to assure company compliance and adherence to internationally accepted best practices.

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>Complex licensing process/Strict licenses: the licensing process can be large and fragmented, which increases the number of decisionmaking entities involved and the frequency of interactions required.Efforts should be made to make these processes and procedures as consistent and transparent as possible across government institutions.

>Need of land acquisitions and management: licensing often includes expropriations and, consequently, complex land management and acquisition processes which create internal challenges in terms of coordination of actions that will need to be addressed.

>Multiples and diverse stakeholders: a large number of institutions (public or private), authorities, communities, and so on, are affected by licensing processes, and their interests are not always aligned to those of the operating company. Stakeholder consultations are critical and must be appropriately managed.

The social license to operate remains highly important for countries to maintain internal stability, reduce armed conflict, and enhance regional cooperation.

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PRICING

Introduction

As opposed to crude oil, LNG does not feature a harmonized global price. In contracts, the price of LNG is segmented into regional markets, the main ones being:

>The Asian market (Japan, Korea, and China) with the Japan Customs-cleared Crude price index

>The European market with the National Balancing Point price index

>The North American market with the Henry Hub price index.

LNG pricing has historically been tied to crude oil, as the replacement fuel to natural gas. Pricing into Japan and much of Asia was based on a percentage of the price of Japan Customs-cleared Crude (JCC), which is the average price of custom-cleared crude oil imports into Japan as reported in customs statistics - nicknamed the Japanese Crude Cocktail. As an example, a pricing formula may be LNG price = JCC x 0.135 where JCC is further defined as the previous three monthly averages of JCC priced in yen and converted into U.S. dollars. In Europe, Brent has been favored in oil-linked LNG pricing formulas.

LNG pricing in parts of Europe and in North America have relatively recently been tied to readily available natural gas indices. In Europe, a main index is NBP or National Balancing Point, a virtual trading location for the sale and purchase and exchange of UK natural gas. In North America, a main index is Henry Hub, a distribution hub in South Louisiana that lends its name to the pricing point for traded natural gas futures contracts.

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